I.
CONTRACT AND SPECIFICATION FOR CONSTRUCTION PROJECT
CONSTRUCTION CONTRACT AGREEMENT:
- A written document between a property owner and a general contractor, specifying the
construction, renovation, alteration, or other work to be done on the property owner’s home
or land. This document outlines which parties will be engaged, the price to be paid, rights
of party, and the date of construction will commerce and be completed.
- This agreement allows parties to put into writing the exact nature and details of the work
to be performed and the responsibilities of each party throughout the course construction.
❖ Construction Pricing and Contracting
Due to the unique characteristics of constructed facilities, it is almost essential to establish
distinct prices for each facility. The cost of constructing a facility includes the direct expenses of
the project, including on-site supervision costs, along with the contractors' markup for general
overhead expenses and profit. The factors that impact the price of a facility will vary depending
on the type of facility and its location. Even within broad categories of construction such as
residential, commercial, industrial, and infrastructure, there are smaller subcategories that have
distinct environments for setting prices. However, all pricing arrangements have certain common
features, which are outlined in the legal agreements that bind the owner and supplier(s) of the
facility. While there may be specific issues to address in different segments of the industry, the
basic principles of the most common pricing arrangements can be broadly described.
❖ Competitive Bidding
The bidding process for a construction project typically involves creating detailed plans
and specifications for the facility based on the owner's objectives and requirements. Qualified
contractors are then invited to bid on the project. To be considered qualified, a contractor must
typically demonstrate previous experience and financial stability. In the private sector, the owner
has a range of options for selecting bidders, from open competition to limiting the bidding pool to
a few preferred contractors. In the public sector, strict rules are in place to ensure fair competition
among all qualified contractors and to prevent collusion among contractors or unethical/illegal
behavior by public officials.
An architectural or engineering firm typically creates detailed plans and specifications for
a construction project and manages the bidding process on behalf of the owner. Bids for the project
are typically submitted on either a lump sum or unit price basis, as directed by the owner. A lump
sum bid represents the total cost that a contractor proposes to complete the project according to
the plans and specifications. Unit price bidding is used when the amount of materials or labor
required for specific tasks is uncertain. In such cases, the contractor may submit a list of unit prices
for those tasks, and the final price used to determine the lowest bidder is based on the lump sum
price calculated by multiplying the quoted unit price for each specified task by the corresponding
quantity in the owner's estimates for quantities. However, the final payment to the winning
contractor will be based on the actual quantities of materials or labor used multiplied by the
respective quoted unit prices.
❖ Negotiated Contracts
Private owners sometimes choose to award construction contracts to one or more
contractors they have selected rather than using a competitive bidding process. Negotiated
contracts are often preferred for large, complex projects or for projects that closely resemble
previous facilities sponsored by the owner. This type of pricing arrangement offers more flexibility
than competitive bidding. Owners may value the reputation or expertise of a particular contractor
who has worked successfully for them in the past. If there is a deadline to complete the project,
the owner may choose to proceed with construction without waiting for the detailed plans and
specifications, relying on a trusted contractor. However, the owner's staff must have the necessary
expertise to evaluate contractor proposals and monitor their performance carefully. Generally,
negotiated contracts require the reimbursement of direct project cost plus the contractor's fee as
determined by one of the following methods:
1. Cost plus fixed percentage.
2. Cost plus fixed fee.
3. Cost plus variable fee.
4. Target estimate.
5. Guaranteed maximum price or cost.
The fixed percentage or fixed fee is determined at the outset of the project, while variable
fee and target estimates are used as an incentive to reduce costs by sharing any cost savings. A
guaranteed maximum cost arrangement imposes a penalty on a contractor for cost overruns and
failure to complete the project on time. With a guaranteed maximum price contract, amounts below
the maximum are typically shared between the owner and the contractor, while the contractor is
responsible for costs above the maximum.
❖ Speculative Residential Construction
In residential construction, developers often build houses and condominiums in
anticipation of the demand of home buyers. Because the basic needs of home buyers are very
similar and home designs can be standardized to some degree, the probability of finding buyers of
good housing units within a relatively short time is quite high. Consequently, developers are
willing to undertake speculative building and lending institutions are also willing to finance such
construction. The developer essentially set the price for each housing unit as the market will bear
and can adjust the prices of remaining units at any given time according to the market trend.
❖ Force Account Construction
Some owners use in-house labor forces to perform a substantial amount of construction,
particularly for addition, renovation, and repair work. Then, the total of the force-account charges
including in-house overhead expenses will be the pricing arrangement for the construction.
❖ Contract Provisions for Risk Allocation
Provisions for the allocation of risk among parties to a contract can appear innumerous areas in
addition to the total construction price. Typically, these provisions assign responsibility for
covering the costs of possible or unforeseen occurrences. A partial list of responsibilities with
concomitant risk that can be assigned to different parties would include:
• Force majeure (- this provision absolves an owner or a contractor for payment for costs due to
"Acts of God" and other external events such as war or labor strikes)
• Indemnification (-this provision absolves the indemnified party from any payment for losses and
damages incurred by a third party such as adjacent property owners.)
• Liens (-assurances that third party claims are settled such as "mechanics liens" for worker wages),
• Labor laws (- payments for any violation of labor laws and regulations on the job site),
• Differing site conditions (- responsibility for extra costs due to unexpected site conditions),
• Delays and extensions of time,
• Liquidated damages (- payments for any facility defects with payment amounts agreed to in
advance)
• Consequential damages (-payments for actual damage costs assessed upon impact of facility
defects),
• Occupational safety and health of workers,
• Permits, licenses, laws, and regulations,
• Equal employment opportunity regulations,
• Termination for default by contractor,
• Suspension of work,
• Warranties and guarantees
Types of Construction Contracts
Lump Sum Contract
In a lump sum contract, the owner has essentially assigned all the risk to the contractor,
who in turn can be expected to ask for a higher markup in order to take care of unforeseen
contingencies. Beside the fixed lump sum price, other commitments are often made by the
contractor in the form of submittals such as a specific schedule, the management reporting system
or a quality control program. If the actual cost of the project is underestimated, the underestimated
cost will reduce the contractor's profit by that amount. An overestimate has an opposite effect but
may reduce the chance of being a low bidder for the project.
Unit Price Contract
In a unit price contract, the risk of inaccurate estimation of uncertain quantities for some
key tasks has been removed from the contractor. However, some contractors may submit an
"unbalanced bid" when it discovers large discrepancies between its estimates and the owner's
estimates of these quantities. Depending on the confidence of the contractor on its own estimates
and its propensity on risk, a contractor can slightly raise the unit prices on the underestimated tasks
while lowering the unit prices on other tasks. If the contractor is correct in its assessment, it can
increase its profit substantially since the payment is made on the actual quantities of tasks; and if
the reverse is true, it can lose on this basis. Furthermore, the owner may disqualify a contractor if
the bid appears to be heavily unbalanced. To the extent that an underestimate or overestimate is
caused by changes in the quantities of work, neither error will affect the contractor's profit beyond
the markup in the unit prices.
Cost Plus Fixed Percentage Contract
For certain types of construction involving new technology or extremely pressing needs,
the owner is sometimes forced to assume all risks of cost overruns. The contractor will receive the
actual direct job cost plus a fixed percentage and have little incentive to reduce job cost.
Furthermore, if there are pressing needs to complete the project, overtime payments to workers are
common and will further increase the job cost. Unless there are compelling reasons, such as the
urgency in the construction of military installations, the owner should not use this type of contract.
Cost Plus Fixed Fee Contract
Under this type of contract, the contractor will receive the actual direct job cost plus a fixed
fee and will have some incentive to complete the job quickly since its fee is fixed regardless of the
duration of the project. However, the owner still assumes the risks of direct job cost overrun while
the contractor may risk the erosion of its profits if the project is dragged on beyond the expected
time.
Cost Plus Variable Percentage Contract
For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the
estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking
the risk on its own estimate, the contractor is allowed a variable percentage of the direct job-cost
for its fee. Furthermore, the project duration is usually specified, and the contractor must abide
by the deadline for completion. This type of contract allocates considerable risk for cost overruns
to the owner, but also provides incentives to contractors to reduce costs as much as possible.
Target Estimate Contract
This is another form of contract which specifies a penalty or reward to a contractor,
depending on whether the actual cost is greater than or less than the contractors estimated direct
job cost. Usually, the percentages of savings or overrun to be shared by the owner and the
contractor are predetermined and the project duration is specified in the contract. Bonuses or
penalties may be stipulated for different project completion dates.
Guaranteed Maximum Cost Contract
When the project scope is well defined, an owner may choose to ask the contractor to take
all the risks, both in terms of actual project cost and project time. Any work change orders from
the owner must be extremely minor if at all, since performance specifications, are provided to the
owner at the outset of construction. The owner and the contractor agree to a project cost guaranteed
by the contractor as maximum. There may be or may not be additional provisions to share any
savings if any in the contract. This type of contract is particularly suitable for turnkey operation.
• Documents included in Contract Agreement:
a simple document will identify the ff. basic elements: owner, general contractor, license number,
worksite, description of work, contract price and payments, contract documents, material, and
labor, starting and completion dates, licensing and permits, subcontracts, work changes and
warranties.
CONSTRUCTION SPECIFICATION
A written document describing in detail the scope of work, materials to be used, methods
of installation, and quality of workmanship for a parcel of work to be placed under contract.
Main types of Specification
o Prescriptive
- Provides details on the types of materials and installations needed to complete a project.
Additionally, prescriptive specifications also describe how to measure installations to ensure that
they were up to project quality and standards.
- Prescriptive specifications provide step-by-step details and instructions on how the types of
materials to be used and the desired installation methods. However, these types of specs can be
split into three subcategories:
• General Provisions - These provisions will reference national or state building codes and
standards that must be complied with.
• Required Products - Lists the type of products and materials required, based on the performance
and structural requirements.
• Execution Procedures - Details the methods of installation and how to measure quality or
effectiveness.
o Performances
- Describes the operational requirements. Fundamentally, the performance specifications should
describe to the contractor what is needed for the final product and how it should essentially
function once completed.
o Proprietary
- Although not as common as prescriptive and performance, proprietary specifications are used if
only one specific product can be used for an installation.
II. CONSTRUCTION PROJECT ORGANIZATION
Project Organization
There is no universal approach to organizing projects, as each project is structured to
achieve its goals in the most effective and efficient way possible. Numerous factors impact the
project's organizational structure, such as the complexity of the project, the parent organization's
culture, the project manager's preferences, the team's knowledge and skills, and the existence of a
project management office within the parent organization.
In developing the project organizational structure, the project manager considers the span
of control for each manager. The span of control represents the number of people reporting to a
manager. For example, the project manager does not want all the engineers on a project reporting
to the engineering manager and assigns senior engineers to report to the engineering manager with
other engineers reporting to the senior engineers. The engineering manager can organize the
engineering reporting structure so that the various engineering discipline managers would report
to him or her. For example, the structural, electrical, and mechanical engineering team leaders
would report to the engineer manager. On a larger, more complex project, the engineer manager
may establish area team leaders and have the structural, electrical, and mechanical engineers report
to an area team leader. If the project is geographically dispersed, with the engineering office staff
in different cities working on the project, then structuring the engineering function by area provides
better coordination and control.
▪ Most projects have similar functions that are important to successfully managing the project.
Included among these are the following:
o Sponsor
o Controls
o Project manager
o Procurement
o Technical management
o Quality
o Administration
Typical Project Organization
On smaller projects, more than one function can be managed by one person. On larger
projects, large teams may be needed to accomplish the work within the function.
o Project Sponsor
The project sponsor is outside the day-to-day operations of the project and has the
organizational authority to provide resources and overcome barriers for the project. The project
sponsor is typically a leader in the parent organization with an interest in the outcome of the
project. As a leader in the parent organization, the project sponsor can provide input into the project
scope and other documents that define project success. The guidance and support from the project
sponsor enhance the ability of the project to successfully meet the parent organization’s objectives.
o Project Manager
The responsibilities of project managers are often similar in scope to those of corporate
CEOs. Project managers are responsible for initiating projects, building teams, allocating
resources, creating work processes, effectively managing projects, and overseeing project
closeout. In some cases, the size and complexity of projects are so large that the project manager's
responsibilities exceed those of other organizational leaders. Examples of such projects include a
mining company building a new mine, an automobile manufacturer designing a new truck, or a
pharmaceutical company moving a new drug from testing to production.
The project manager's responsibilities may differ based on the complexity and
organizational structure of the project. Some of these responsibilities may include defining and
managing client expectations, initiating project start-up activities, developing the scope, managing
changes, and providing direction to the technical team. In certain projects, the technical leadership
may come from the technical division of the parent organization.
Despite varying functional responsibilities, the project manager's primary role remains
consistent across all projects. The project manager's primary role is to provide leadership, create a
vision of success, connect everyone involved in the project to that vision, and provide the means
and methods to achieve success. The project manager establishes a project culture focused on goals
and timelines while providing leadership throughout the project.
o Project Control
In general, project controls encompass both planning and progress tracking functions. It is
a critical aspect that provides vital information to all other project functions. Project control works
closely with the project manager to assess the cost and scheduling implications of various options
during the project's lifespan. In some cases, accounting functions such as payroll, budgeting, and
cash management may fall under project controls. However, in larger projects, accounting
functions are typically kept separate due to the discrepancy in the level of accuracy required.
Accounting practices demand precise expense tracking, while project controls often rely on cost
estimates within a range, which may not align with accounting practices. Therefore, separating the
two functions allows each to operate within their own accuracy range. The following are typical
activities included within the project control’s function:
• Estimating
• Tracking costs
• Analyzing trends and making projections
• Planning and scheduling
• Managing change
• Tracking progress against schedule
The project controls team gathers this information from all the functions on the project and
develops reports that enable each functional manager to understand the project plan and progress
against the plan at both the project level and the functional level. On large complex projects, some
project managers will assign project controls professionals to work within the major functions as
well as the project management office. This approach allows each function to plan and track the
function’s work in more detail. The project controls manager then coordinates activities across
functions.
o Project Procurement
The approach to purchasing the supplies and equipment needed by the project is related to
the complexity profile of the project. A small project with a low complexity level may be able to
use the procurement services of the parent organization. In an organization where project resources
reside in various departments, the departments may provide the supplies and equipment each team
member of the project may need.
On larger, more complex projects, the procurement team has several responsibilities. The
team is responsible for procuring the supplies and equipment (such as office supplies and
computers) needed for the project team and the supplies and equipment (such as the training
equipment) needed to execute the project. On a typical construction project, the procurement team
would rent a construction trailer, office supplies, and computers for the project team to establish a
construction office at the construction site. The procurement team would also purchase the
concrete, rebar, steel, and other material needed to construct the building.
o Technical Management
The technical management on the project is the management of the technology inherent in
the project —not the technology used by the team to manage the project. The technical complexity
on a project can vary significantly. The technological challenges required to build a bridge to span
a five-hundred-meter canyon are significantly different from those required to span a five-
thousand-meter body of water. The technological complexity of the project will influence the
organizational approach to the project. The technological complexity for a project reflects two
aspects: the newness of the technology and the team’s familiarity with the technology. The
newness refers to the degree to which the technology has been accepted in the industry. The more
accepted the technology is in the industry usually means that more knowledge and experience will
be available to the team. Familiarity refers to the experience the project team has with the
technology. The less familiarity the team has with the technology, the more energy and resources
the team will expend on managing the technological aspect of the project. For projects with high
levels of project technology, a specialist may be hired to advise the technology manager.
o Project Quality
Project quality is often part of the technical manager’s responsibility. On large projects or
projects with a high degree of technical complexity, the quality is sometimes a separate function
reporting to the project manager. The project quality manager focuses on the quality of the project
work processes and not the quality of the client’s product. For example, if the project is to design
and construct an automobile factory, the quality manager focuses on the project work processes
and meeting the technical specification of the equipment installed by the project team. The project
quality manager is not responsible for the quality of the car the plant produces. If the plant
functions to the defined project specifications, the quality of the plant output is the responsibility
of the plant quality department, and it may take several months for the plant to refine the work
processes to meet the design specifications of the car. On a construction project, the quality
manager may test steel welders to assure the welders have the skills and that the welds meet project
specifications. On a training project, the quality manager may review the training curriculum and
the qualification of the instructors to assure the training provides the knowledge and skills
specified by the client. On a drug development project, the quality manager may develop processes
to assure the water and other raw material meet specifications and every process in the
development process is properly documented.
o Project Administration
The administrative function provides project specific support such as the following:
• Accounting services
• Legal services
• Property management
• Human resources (HR) management
• Other support functions found in most organizations
Typically, the main organization provides assistance for these tasks. For instance, those
working on the project will receive human resources (HR) aid from the HR department of the main
organization. The HR department will handle matters like compensation, benefits, and policies for
employees working on the project. Accounting responsibilities such as determining costs, taxes,
year-end project reports, and disposing of property at the project's end will be taken care of by the
main organization.
For small and simple projects, the project manager should have enough understanding to
collaborate with the functional leaders of the parent organization. However, for more intricate
projects, an administrative manager may be appointed to oversee administrative tasks. On larger
and more complicated projects, an administrative function may be set up within the project team,
with resources assigned to handle various functions. Regardless, the administrative function of a
project is closely tied to the legal and organizational obligations of the main organization, and
close coordination is crucial.
